2011 (11) TMI 646 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made on account of non-refundable membership fees.
2. Treatment of loss incurred on derivatives as speculative loss u/s 73 of the Income Tax Act, 1961.

Summary:

Issue 1: Deletion of Addition Made on Account of Non-Refundable Membership Fees

The Revenue's appeal concerns the deletion of an addition of Rs. 4,13,81,432/- made by the assessing officer on account of non-refundable membership fees. The assessing officer had taxed the total amount received during the year of receipt itself, while the assessee accounted for the membership fee yearly in proportion to the period for which the membership was granted. The Tribunal found that the issue is covered by the decision of ITAT in the assessee's own case for the assessment year 2006-07, where it was held that the amounts received under different membership schemes are in the shape of advance and the income would accrue only in the later period when services are rendered. The Tribunal upheld the CIT (Appeals)'s order deleting the addition, referencing the judgment of the Hon'ble Delhi High Court in the case of Dinesh Kumar Goel and the Special Bench decision in Mahindra Holidays & Resorts. Consequently, the appeal filed by the Revenue was dismissed.

Issue 2: Treatment of Loss Incurred on Derivatives as Speculative Loss u/s 73

The assessee's appeal concerns the upholding of the addition made on account of loss incurred on derivatives by holding it as speculative loss within the meaning of Explanation to section 73 of the Income Tax Act, 1961. The AO treated the loss of Rs. 492.71 lakhs from trading in derivatives as speculative loss, which could not be adjusted against business income. The CIT (Appeals) upheld this view, distinguishing the case from the Special Bench decision in DCIT Vs. Venketeshwar Inv. & Finance P. Ltd.

The Tribunal, however, noted that trading in derivatives is distinct from trading in shares and is not deemed speculative under section 43(5) if carried out in a recognized stock exchange. The Tribunal referenced several ITAT decisions, including those of the Mumbai Bench in DCIT Vs. SSKI Investors Service P. Ltd. and RBK Securities P. Ltd., which held that derivative transactions are not speculative. It concluded that the loss from derivative transactions should be set off against other business income, setting aside the CIT (Appeals)'s order and allowing the assessee's appeal.

Conclusion:

The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed.